March 2014

David and Goliath: the High Court battle looms - for mutual trust and confidence in employment contracts

In Australia there has been ongoing controversy as to whether there is implied in all employment contracts a term of mutual trust and confidence imposing behavioural obligations on employers.

The High Court of Australia will hear that controversy on 8 April 2014 with a decision likely by the end of this year. 

The case before the High Court concerns an appeal from the landmark ruling of the Full Federal Court in Commonwealth Bank of Australia v Barker [2013] FCAFC 83.  The Full Federal Court found, by a 2:1 majority, that there is implied into employment contracts the term of mutual trust and confidence.

Workers will want the term; bosses will not – a David and Goliath battle?

In this bulletin, we look at Goliath’s armour and shield to defeat the existence of the implied term.  We then contrast Goliath’s argument with the persuasion of David’s staff and sling.  The purpose of this bulletin is to ask you:  do you believe Australian courts should acknowledge the existence of the implied term?

The implied term

First, you need to know what is the implied term.  The UK House of Lords in Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20 said the term was:

an employer must not, without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.

It has been said the implied term creates a positive duty for an employer to act fairly in its treatment of employees.  However, the implied term does not operate in respect of the act of dismissal itself but may apply to acts leading up to and separate from dismissal.

David and Goliath - the facts

Mr Barker's employment contract permitted termination at any time on four weeks’ notice.  The contract also recognised the possibility of Mr Barker's position becoming redundant.  The contract provided that where his position becomes redundant and the Bank is unable to place him in an alternative position, Mr Barker would be paid a redundancy package.

Mr Barker’s position was made redundant and he was asked to leave the Bank's premises immediately.  His email and mobile communications were disconnected.  As such, subsequent efforts to communicate with him about redeployment were thwarted and less than satisfactory.  No alternative job was found and Mr Barker’s employment ended.

The Full Federal Court found the Bank’s conduct breached the implied term as a result of the Bank not taking positive steps to consult with Mr Barker about redeployment.  Mr Barker was awarded $335,623.57 compensation for the loss of the chance that he would have been redeployed and remained employed with the Bank.

Now the battle heads to the High Court, to determine if the implied term exists.

Goliath argues there is no implied term

The Bank argues that to imply the term of mutual trust and confidence in all employment contracts, the implication of that term must be necessary.  The test of necessity is that unless the term is implied, the enjoyment of rights under the employment contract would be rendered nugatory, worthless or seriously undermined.  The Bank argues, in that sense, there is no necessity to imply the term into all employment contracts.

The employment contract is more than workable without the term.  Indeed, the employment contract has operated effectively for many years without the need for such a term to be implied to make the contract effective.

An employee works and then earns remuneration.  It has been the law for many years that the employment contract can be terminated on notice for any reason or no reason without any obligation of fairness or natural justice.  Parties have the contractual freedom to leave the relationship; the days of slavery are long gone.

Parliament has established a complex and detailed unfair dismissal regime that should not be circumvented by the implied term.  Some employees have access to this regime; others do not.  For the Courts to acknowledge the existence of the implied term will be to create an entitlement when Parliament has not given that entitlement.  Courts cannot legislate.

Further, the Bank argues that the implied term is expressed at such a general level that it is impossible to know exactly what it requires of an employer in any particular case.  Terms should only be implied if they create clear and certain obligations.

David argues the implied term is justified

Mr Barker argues that the test of necessity requires the Court to have regard to the nature of the employment relationship and to consider more general policy considerations including the social consequences for implying, or not implying, the term.

Mr Barker argues that the employment relationship is unique due to the fact the relationship is personal.  Employees must perform work personally.  Employees submit to the control of the employer.  It is a relationship of economic dependence in which there is a disparity of power.  Employment is one of the most important things in an employee’s life and creates a sense of identity and self worth.

The implied term is therefore necessary to protect the employment relationship.  The maintenance of the relationship is necessary for an employee to earn a living and obtain other broader non-wage benefits.  The implied term prevents the destruction or serious undermining of the relationship.

Mr Barker argues that the law found it necessary to imply a term that employees are not to engage in conduct incompatible with or destructive of the confidence required in the employment relationship.  If it is necessary to imply that term, Mr Barker says it is similarly necessary to imply a term to prevent employers destroying the relationship.

Who will win the battle?

Goliath has the shield of conservatism.  David is using persuasion.  The High Court has made comments in the past about employment involving mutual confidence.  However, the intersection with unfair dismissal and other workplace laws is complicating and problematic. 

So who will win?  We may see a split decision from the High Court, just as views amongst business owners, HR practitioners, lawyers and employees will differ.  Employment laws have always been polarising.

Author: James Mattson

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